Between a ROC and a hard place...

A recent case highlights the importance of clear contract drafting when trying to exclude certain losses as being indirect or consequential and is of particular relevance to the renewable energy sector.
The case: McCain v ECO-TEC

3 November 2011

A recent case highlights the importance of clear contract drafting when trying to exclude certain losses as being indirect or consequential and is of particular relevance to the renewable energy sector.
The case: McCain v ECO-TEC

McCain Foods GB Limited (McCain) operates a wastewater treatment plant at one of its sites. The product of which is methane-rich biogas which McCain wished to use as fuel in a combined heat and power (CHP) plant. The biogas contains hydrogen sulphide which needs to be removed before it can be used as fuel in the CHP plant. McCain entered into an agreement with ECO-TEC (Europe) Limited (ECO-TEC) for the purchase and installation of a BGPur system (the "System") to 'scrub' the hydrogen sulphide in the biogas. The CHP plant was intended to provide renewable energy for a McCain facility on the same site and McCain would qualify to receive Renewables Obligation Certificates (ROCs) for the electricity produced.
The issue

The System was plagued with problems and ultimately it was never commissioned. Accordingly McCain sued ECO-TEC for breach of contract and to recover the purchase price along with a number of losses it had suffered. McCain argued that the loss of revenue from the ROCs which McCain would have qualified for had the System worked properly were direct losses under the contract and therefore recoverable from ECO-TEC. 
The clause

The argument before the court centred on the definition of consequential loss as the contract stated:

"...Seller will indemnify and hold McCain and its directors, officers, employees and agents harmless from and against any and all losses, liabilities, damages and expenses whatsoever (in no event however will Seller be responsible for indirect, special, incidental and consequential damages) arising out of any breach by Seller of any commitment or other obligation contained in this Agreement …" (Emphasis added)
The decision

ECO-TEC argued that the losses claimed amounted to "indirect, special, incidental and consequential damages" and were therefore excluded by the contract. However, the court determined that the damages claimed were direct losses as they flowed naturally from ECO-TEC's breach of contract and were therefore not consequential. The court held that the use of the System as intended would have resulted in revenue from ROCs and the lost revenue was therefore recoverable as a direct loss. McCain were awarded damages to cover the value of the revenue recoverable from ROCs (amongst other things) had the System been commissioned and worked as intended.
The alternatives

As a result of the decision McCain were awarded a considerable sum in damages of which over £600,000 was awarded with regard to the loss of revenue attributable to ROCs while the contract price for the System was less than half of that. The case is a timely reminder for those engaged in the both the procurement and design, fabrication and construction of renewable energy facilities to look carefully at the terms of their agreements lest they fall foul of similar provisions.

Would the result have been any different had an industry standard form contracts been used?

NEC3 contains a secondary option clause which deals with limitation of liability at X18. Sub-clause X18.1 imposes a limitation on consequential losses to a particular amount. In light of the McCain decision it would appear that the wording of this clause would also have been insufficient to prevent a claim for loss of revenue from ROCs if such losses are not indirect.

The relevant provision under the IChemE "Red Book" contract is Sub-Clause
If it had been used it would appear to have avoided McCain's argument and resulted in a favourable decision for ECO-TEC as it specifically excludes:

"…loss of deferment or anticipated or actual profit, loss of revenue, loss of use, loss of production, business interruption or any similar damage or for any consequential of indirect loss of any other kind resulting from or arising out of or in connection with the Works or the performance thereof or any act or omission relating thereto howsoever caused …"

Clause 62.5 contains a general prohibition on claiming for indirect losses. As mentioned above, loss of revenue from ROCs is not considered indirect or consequential and so it would seem that use of this clause would have resulted in the same outcome for ECO-TEC.

If a party wishes to protect its position vis-à-vis recovery or exclusion of losses such as loss of revenue from ROCs as claimed in the McCain case, they should ensure the contract in place specifically allows or excludes this as a particular head of loss rather than relying on a generic exclusion clause simply referring to indirect and consequential losses.